There are two things in life that are definite….death and taxes!

As a taxpayer, it’s important to understand tax brackets and how they work. 

The government taxes income using a progressive tax system, which means that people with higher incomes are taxed at a higher rate than those with lower incomes. 

There are seven tax brackets in the United States, ranging from 10 percent to 37 percent, where you fall depends on you.

Majority of people have a general understanding of tax brackets – that is, the different levels of income that are taxed at different rates. 

However, there are a few things that are often misunderstood.

Most people think of their tax bracket as the percentage of their income that they’ll owe Uncle Sam come April 15th. While that’s technically true, your “effective” tax bracket is actually lower than your marginal rate. 

It’s important to know that your tax bracket is not the same as your marginal tax rate. 

Your marginal tax rate is the rate that you pay on your last dollar of income; your tax bracket is the range of income that is taxed at that rate. 

Once you know your marginal tax rate, you can calculate your taxable income by subtracting any deductions or exemptions you’re entitled to. 

For example, if you’re in the 25% tax bracket and you have $50,000 in taxable income, your marginal tax rate would be 25%. However, if you’re entitled to a $5,000 deduction, your taxable income would be reduced to $45,000.

Deductions help to lower your taxable income, while exemptions exempt certain types of income from taxation altogether.

Who doesn’t want to save some money when they could, right?

How You Can Leverage This Understanding To Make Better Decisions For You And Your Family

Everyone’s tax situation is different. Your job, whether you’re married, single or have children all play a role in how much taxes you’ll pay. 

One of the things you can do to make the most of your tax bracket is to take advantage of deductions. 

Deductions lower your taxable income, which means you’ll pay less in taxes overall. 

There are two types of deductions: above-the-line and below-the-line. Above-the-line deductions are available whether you itemize your deductions or not, and they include things like educator expenses, alimony payments, and IRA contributions. 

Below-the-line deductions are only available if you itemize your deductions, and they include things like medical expenses, mortgage interest, and state and local taxes. 

You can also take advantage of tax credits, which lower your tax bill dollar-for-dollar. Tax credits are often available for things like energy-efficient home improvements, adopting a child, and being a low-income earner. 

By lowering your tax bracket, this will put more money in your pocket and allow you to save money for the future!

Need help in understanding where you fall in the tax bracket spectrum? Contact me today! I will help guide you down the path of financial security and success.